1. business and industrial

Report of Business Tax Advisory Committee
Recommending How to Reform
Gross Receipts Business Tax
April 18, 2012
Where We Are Today
• Los Angeles Employs a Widely Unpopular Tiered Gross Receipts Tax
Structure
• Business Tax is Not Competitive with Neighboring Cities
• Businesses Believe Rates are Too High, with Ample Justification
• Classifications are Confusing & Lack Logical Connections
• Many Businesses Have Left,
Left are Leaving or are Threatening to Leave Los
Angeles
• Other Businesses Decline to Locate or Expand in Los Angeles
• Increasingly Difficult to Attract New Businesses
• Net Job Loss Despite Sharp Increase in Population
• High, Double-Digit Unemployment
– 13.3%, an Alarming 18% Higher than the State & 51% Higher than the
Nation
– Underemployment Approaching 20%
2
Los Angeles: Population Growth,
Employment Decline
City of Los Angeles Population & Employment Trend Compared to Rest of LA County
1980
2010
Change
Percent Changes
1980-2010
Los Angeles
g
Cityy
Population
Employment
2,969,181
1,815,494
3,792,621
1,650,417
823,440
(165,077)
27.7%
-9.1%
Rest of LA Countyy
Population
Employment
4,503,580
2,123,508
6,025,984
2,472,846
1,522,404
349,338
33.8%
16.5%
• Between 1980 and 2010, the Population of the City of Los
Angeles has Grown by 27.7% while the Number of Jobs Created
in the City has Declined by 9.1%
• In Comparison,
Comparison the Population of the Rest of LA County
(Excluding LA City) has Grown by a Similar 33.8% while the
Number of Jobs Created has Increased by 16.5%, Fully 25.6%
and 514,000 Jobs Higher than LA
Source: Southern California Association of Governments (SCAG) RTP Database
3
Impressive City, Depressing Job Performance
• LA
LA, Nation’s 2nd Largest City with Compelling Comparative
Advantages, Should be a Jobs & Business Magnet
– Two World Renowned Research Universities ((USC & UCLA))
– Highly Skilled Workforce
– World Leading Industry Sectors Ranging from Entertainment &
Fashion to International Trade & Manufacturing
– Some of the World’s Most Valuable Fixed Assets
o Nation’s
Nation s Largest Seaport (Port of Los Angeles)
o World’s Busiest Origin & Destination Airport (LAX)
o Nation
Nation’ss Largest Municipally Owned Utility (LADWP)
• So Why Has LA Not Only Failed to Produce a Single Net New
Private Sector Job in Three Decades, But Actually Lost 165,000 Net
Jobs?
b
4
LA’s Gross Receipts Tax is a Job Killer
• LA City is Unique in LA County in Underperforming Job Creation
– The Difference? LA City Has the Highest Business Tax by a
Factor of 9.5 Times* the Average for the Other 87 Cities in the
County
o City’s Highly Visible Position on Top of Business Tax Totem
Pole Severelyy Hinders Business Attraction,, Expansion
p
&
Retention and thus Job Creation
o 2010 Survey by Los Angeles County Business Federation
Found that 56% of Businesses in Rest of LA County View
Their City as Business Friendly vs. Only 26% in City of LA
• As Weak Economy Drives Heightened Competition for Business &
Employment, LA’s Gross Receipts Tax Looms Larger as
Disincentive to Economic Activity & Job Creation
– Companies Look at Total Cost of Occupancy Within a City
Including Business Tax (CB Richard Ellis, Travers Realty)
*Source: 2010 Kosmont-Rose Institute
Cost of Doing Business Survey
5
Current Rates in 15 Highest Cities in Los Angeles
y
& Occupations”
p
Catch-All
County—“Professions
Los Angeles
Santa Monica
Culver City
Inglewood
El Monte
San Fernando
Claremont
Compton
Gardena
Hawthorne
Lomita
P l d l
Palmdale
Bell
Huntington Park
Irwindale
Source: 2010 Kosmont-Rose Institute
Cost of Doing Business Survey
0.507%
0.503%
0.301%
0.165%
0.147%
0.132%
0.111%
0.107%
0.101%
0.100%
0.073%
0 056%
0.056%
0.044%
0.040%
0 033%
0.033%
6
Current Rates in 15 Largest U.S. Cities
—“Professions & Occupations”
p
Catch-All
Gross Receipts
Employee Tax
City
Rate
Per 100 Employees
New York
0.000
*
Los Angeles
0.507
Chicago
0.000
$4,320
Houston
0.000
Phil d l hi
Philadelphia
0 142
0.142
*
Phoenix
0.000
San Antonio
0.000
San Diego
0.000
$560
Dallas
0.000
San Jose
0.000
$1,806
Jacksonville
0.000
$526
Indianapolis
0 000
0.000
San Francisco
0.000
$105,500
Austin
0.000
Columbus
0.200
* Tax Imposed on Income
Source: 2010 Kosmont-Rose Institute
Cost of Doing Business Survey
7
Current Rates in 15 Other Major Metros in U.S.
—“Professions & Occupations”
p
Catch-All
City
L Angeles
Los
A l
Baltimore
Boston
Cincinnati
Cleveland
Denver
Detroit
Las Vegas
Miami
Minneapolis
New Orleans
Oakland
Seattle
St. Louis
Washington DC
Source: 2010 Kosmont-Rose Institute
Cost of Doing Business Survey
Gross Receipts
Rate
0 507
0.507
0.000
0.000
0.210
0.000
0.000
0.000
0.000
0.055
0.000
0 001
0.001
0.252
0.216
0.000
0.000
Employee Tax
Per 100 Employees
$4,800
$7,500
$7,500
,
8
Penal Aspect of “Professions & Occupations” Catch-All
Out of Touch with Current Economic Realityy
• Gross Receipts Tax 1st Adopted in 1936, when L.A. Economy was
Manufacturing Driven
• Rates were Designed to Attract & Retain Manufacturing Jobs
Total Nonfarm Employment*
1949
2011
Construction, 2.6%
Construction, 7.7%
Transportation &
Utilities, 8.0%
Mining, 1.0%
Transportation &
Utilities, 3.9%
Manufacturing,
30.3%
Government 12.6%
Government,
12 6%
Mining, 0.1%
Manufacturing, 9.9%
Trade (wholesale &
retail), 15.5%
Services, 52.9%
Services, 14.7%
*Los Angeles County
Source: LAEDC
Trade (whoesale &
retail), 25.6%
Government, 15.0%
9
Penal Aspect of “Professions & Occupations” Catch-All
Out of Touch with Current Economic Realityy
• Stark Reality of 2011 is L.A. Economy is Service-Based
– Services Businesses were 52.9% of Total Last Year, Up from Just
14.7% a Half-Century Ago
– Manufacturing Down to an Anemic 9.9% of Total from 30.3%
• Since 1949,
1949 L
L.A.
A County Services Sector Employment has Grown by
860% while Manufacturing has Shrunk by 11%
• A Gross Receipts Tax Structure that Gouges the Region’s Primary
Source of Employment is Counterproductive & Self-Defeating
• No Surprise, 43% of Taxpayers Lumped Into Highest “Catch-All”
Category & Pay 59% of Taxes
• City Tax Should at Worst be Neutral and at Best be Source of
Encouragement for Business Location & Job Creation—L.A.’s
Hi
hi l Onerous
O
G
R i t Business
B i
T is
i an Obstacle,
Ob t l a
Hierarchical,
Gross
Receipts
Tax
Deterrent & an Anachronism
10
Professions & Occupations Catch-All Has Grown At
More Than Double the Rate of All Other Classes
Growth in Number of Accounts by Class
450,000
400,000
Number of Acccounts
350,000
300,000
9 4% CAGR
9.4%
250,000
Class 9
All Other Classes
200,000
150 000
150,000
44.2%
2% CAGR
100,000
50,000
0
FY2004-05
FY2005-06
CAGR – Compound Annual Growth Rate
FY2006-07
FY2007-08
FY2008-09
FY2009-10
FY2010-11
• Class 9, which Not-So-Coincidentally Bears the Highest Tax Rate, is “Catch-All” for All Businesses Not Otherwise
Classified
― Number of Taxpayers Categorized as Class 9 has Risen from 35.7% of Total in 2004/2005 to 42.6% in
2010/2011 and the Amount of City’s Business Taxes They Pay has Grown from 55.7% to 58.6%
11
Business Tax Should Not Be Impediment to
Attractingg & Retaining
g Services Companies
p
• Attracting Manufacturing Jobs No Mean Feat for L.A. Due to
California “Barriers”
Barriers of Environmental & OSHA Regulations,
Permitting, Licensing, Labor Laws, Income Tax, Etc.
• Attracting Services Jobs Much Easier Task for L.A. Except for One
Thing: Substantially Above-Market Business Tax
• Services Companies Consume Less City Services than
f
i & Reall Estate-Based
d Businesses
i
i ll &
Manufacturing
so Logically
Fairly Should be Taxed Less, Not More
• Once City Tax “Barrier”
Barrier Lowered,
Lowered Businesses & Jobs Will Return
• Influx of New Businesses Along with Stemming Tide of Departing
Old Businesses Will Expand Tax Base, but That
That’ss Not All…
12
Lowering Business Tax Rate Will Increase Economic
Activity,
y Increasing
g Other Revenue Streams
• More Businesses = Greater Demand for Commercial Properties =
Higher Prices = Higher Property Tax Receipts for City
• More Businesses = More Employees = Greater Demand for
Residential Properties = Higher Property Tax Receipts for City
• More Businesses & More Employees = Greater Purchasing Power =
Higher Sales Tax Receipts for City
• Many Services Jobs are Good Quality, Higher Paying Positions—
Exactly the Kind of Employment City Should be Seeking for its
Residents
• Hand-in-Glove
Hand in Glove Fit with Intellectual Human Capital Generated by
L.A. County’s 120 Accredited Colleges & Universities
• Imperative
p
L.A. City
y Attracts its Fair Share of New Businesses
Fueled by Entrepreneurship & Innovation—Leading Source of Job
Growth
13
City Policy Makers Take Action
• Business Tax Advisory Committee (“BTAC”)
( BTAC ) formed in January 2010
at Behest of Mayor & City Council
• 8 Current Appointees to Committee
– Michael Banner (Parks)
– Kathy Faulk (Hahn/Buscaino)
– Saúl Gomez (Villaraigosa)
– Lloyd Greif (Garcetti)
– Mel Kohn (Alarcon)
– Craig Morris (Garcetti)
– Melissa Patack (Villaraigosa)
– Mel Wilson (Wesson)
• BTAC’s Mission
– “To Reform the Los Angeles City Business Tax to Create a Fair,
Transparent, Competitive and Business-Friendly Environment”
14
BTAC Members
 Successful investment banking career spanning three decades
― Founded
F
d dL
Los Angeles
A l bbasedd middle-market
iddl
k investment
i
bank
b k Greif
G f & Co.
C in
i 1992
― Prior - Vice Chairman of Sutro & Co. and Managing Director of Investment Banking Division
― Management Consultant with Touche Ross & Co. (Deloitte Consulting LLP)
 Endowment of Lloyd Greif Center for Entrepreneurial Studies at USC in 1997
 Chairman,
Chairman Los Angeles Police Foundation,
Foundation Director,
Director California Chamber of Commerce & Past
Chairman, LAEDC
Chairman — Lloyd Greif
President & CEO, Greif & Co. BA - UCLA (Economics), MBA - USC (Entrepreneurship) and JD - Loyola Law School
Vice-Chair — Craig Morris
Partner, KPMG LLP
Michael Banner
President & CEO
Los Angeles LDC, Inc.
 State and Local Tax Partner with 27 years experience in KPMG LLC’s Los Angeles office where he
leads Pacific Southwest Income and Franchise tax practice
― Prior - lead tax partner for many of KPMG’s audit and tax clients
― Co-authored Practical Guide To California Taxes: The Impact Of Economic Crisis — a book on
recent developments in California taxation published in May 2010
Societyy off CPAs
 Member,, American Institute off Certified
f Public Accountants and California
f
 BS from Pepperdine University – Accounting and MS in Taxation from Golden Gate University
 President and CEO of Los Angeles LDC, Inc., a U.S. Department of Treasury certified Community
Development Financial Institution
― Responsible for infusing $250 million of capital into low income and distressed communities while
stimulating new business and employment opportunities
― Prior – Vice President at Security Pacific National Bank
― Past Chairman, Urban Land Institute District Council Executive Committee
Trustee Community Reinvestment Fund & Member,
Member Union Bank Community Advisory Board – South
 Trustee,
LA Initiative
 BA – Loyola Marymount University (Bus. Admin.), USC Ross Minority Program in Real Estate
15
BTAC Members
 General Manager of Omni Hotel Los Angeles at California Plaza
― 25-year industry veteran having worked with such companies as Destination Hotels & Resorts,
Rosewood Hotels, Hilton Hotel Corporation, Disney Hotels, The Mansion on Turtle Creek and
Richardson Hotels
― Prior - General Manager positions at both Hilton Checkers and Millennium Biltmore
 Member,
Member Board of Directors of LA Inc
Inc., the Convention and Visitors Bureau for Los Angeles,
Angeles and the
Executive Board for the Downtown Central Business Improvement District
Kathy Faulk
General Manager, Omni Hotel BS – Texas A&M Commerce (Business Administration)
 Senior Manager and Project Manager for Ernst & Young’s West region SALT incentives practice
― During nine-year tenure, has provided SALT negotiated and statutory incentives services to many
of Ernst & Young’s largest manufacturing, consumer/retail and healthcare clients
― Prior - Senior Regional Manager with the Los Angeles County Economic Development
Corporation where worked alongside State, counties, and cities to retain and attract major
to California
companies
p
 BS – UC Berkley (Business Administration)
Saúl Gomez
Senior Manager, Ernst & Young
 Past Managing Partner of Kirsch, Kohn & Bridge LLP, Certified Public Accountants
 Member of the American Institute of Certified Public Accountants and California Society of Certified
Public Accountants (CalCPA)
Mel Kohn
Former Managing Partner
Kirsch, Kohn & Bridge LLP
― Past Member of the Board of Directors of the Los Angeles Chapter of CalCPA
 Current Co-Chair of the San Fernando Valley Attorney/CPA Discussion Group
 Board Member, Valley Industry & Commerce Association and Valley Economic Development Center
 BS from UCLA – Business Administration
16
BTAC Members
 Vice President, State Government Affairs for MPAA
― Has represented major motion picture studios in state and local government relations since 1997
― Prior – worked in the United States Senate on the legal staff of the Senate Judiciary Committee and
as counsel to the Chairman of the Senate Ethics Committee
― Began legal career in Chicago as an associate with law firms Friedman & Koven and Sachnoff &
Weaver, specializing in labor and employment law
 Serves on the Budget and Finance Committee of Temple Beth Am in Los Angeles
Melissa Patack
VP, State Government Affairs
Motion Picture Association of  BS – Cornell University (Industrial and Labor Relations), JD – Boston University School of Law
America, Inc.
Mel Wilson
Altera Real Estate Mel
Wilson & Associates
 Entrepreneur and real estate broker with over 23 years of experience
experience, recipient of the Distinguished
Realtor of the Year Award & former member, LA City Fire Commission
 Director, Metropolitan Transportation Authority (MTA), Past Chairman, United Chambers of
Commerce of San Fernando Valley and Founding Board Member, Valley Economic Alliance
 President of the Southland Regional Association of Realtors, California’s largest local real estate
tradegroup, and Member of the California State University President’s Advisory Board
 BS – California State University – Northridge (Business Administration)
17
BTAC Goes to Work
• Over the Past Two and a Half Years
Years, BTAC Has Held 35
Public Meetings and Countless Subcommittee Meetings,
Hearings and Forums with
– Mayor’s
Ma or’s Office
– City Council Members
SALT ) Professionals
– State and Local Taxation ((“SALT”)
– Community Members
– Entrepreneurs
– Business Executives
– City Staff/Proprietary Departments
– Academicians and Economists
– Business Organizations
– County Officials
18
BTAC’s Initial Recommendations
• Since January 2010, BTAC Has Made Numerous Tax Reform
Recommendations That Have Been Implemented To
– Attract New Business & Bring Employment to Los Angeles
o 3-Year
3 Year Business Tax Exemption for New Businesses
– Create Consistency, Fairness and Transparency in Administration of
the Business Tax
o Development
D l
t & Adoption
Ad ti off a Taxpayer’s
T
’ Bill off Rights
Ri ht
o Expansion of Board of Review to Consist of a Majority of Public
Members
o Establishment
bli h
off Cl
Clearly
l Defined
fi d S
Statute off Limitations
i i i
ffor Tax
Audits
o Made Prior Board of Review Decisions on Business
Cl ifi ti Retroactively
Classification
Ret
ti el Irreversible
I e e ible if No
N Change
Ch e in
i
Business Facts or Circumstances
– Increase Compliance with City Tax Code by Businesses
o Established
E bli h d 3-Year
3Y V
Voluntary
l
Di
Disclosure
l
Program
P
to IIncentivize
i i
Businesses Currently Not on City’s Tax Rolls to Come Forward
19
Goals of Business Tax Code Reform
•
•
•
•
•
•
•
•
Spur Job Creation
p
Achieve Simplification
Increase Compliance
p
y
Foster Transparency
Increase Tax Base
Make It Predictable & Fair
Diminish Controversy
Signal Los Angeles is Worker and Business Friendly
& Does Not Burden its Constituents in an Already
Hyper-Competitive
yp
p
Market
20
Benefits of Gross Receipts Tax Reform
• Business Tax Lowered as a Barrier to Starting Up in,
in Relocating to
or Staying in Los Angeles
• Increased Cash Flow for Businesses to Expand in City
• Simplifies Tax Code & Reduces Potential for Manipulation and Abuse
• Leads to:
– Job Growth
– Business & Economic Expansion
– Increased Sales Tax Base
o Businesses
o Employees
– Increased Property Values & Taxes
– Increased Revenues from Permits, Licenses & Fees
– Increased Base of Businesses with Attendant Multiplier Effects
• Brings Tax Code into Alignment with Reality of 21st Century Highly
Mobile Service-Based
Mobile,
Service Based Economy vs.
vs Manufacturing-Based
Manufacturing Based when 1sst
Conceived 76 Years Ago
21
Benefits of Gross Receipts Tax Reform (Cont.)
• LA’s
LA s Onerously High Gross Receipts Tax is Not Just Unfriendly to
Business― It’s Unfriendly to Workers, the City and the Quality of Life for
All Residents
• Businesses Are the Creators of Private Sector Jobs,
Jobs Which Induce &
Indirectly Create More Jobs
• Together, These Direct, Indirect & Induced Jobs Generate Local & State
Tax Revenue that
h Supports Social
i l Programs Which
hi h Support LA’s Quality
li
of Life
• Hence, LA’s Vastlyy More Burdensome Business Tax is Not Onlyy Business
Unfriendly―It’s Worker, City & Quality of Life Unfriendly, Too
• Reduction in Jobs, Budgetary Resources & Quality of Life Due to Highly
Reviled Gross Receipts Tax is Even More Pronounced Since Neighboring
Cities Have Either Much Lower or No Business Taxes
• More Businesses Locating in City Also Increases Local Philanthropy
– Corporate Giving is Greatest Where Company is Headquartered
22
No “Leap of Faith” That Reducing Taxes Will
Spur Growth in Economic Activity & Revenues
Not Uncharted Territory as City Has Done It Before: Across-the-Board 15%
Reduction in Business Taxes Phased in Over 5 Years
– Business Tax Receipts Grew 21%,
21% from $373 Million in FY 2003/04 to $453
Million in FY 2008/09
– Similarly, General Fund Receipts Grew 23%, from $3.576 Billion in FY
2003/04 to $4.397
$4 397 Billion in FY 2008/09
General Fund and Business Tax Revenues
($ in millions)
$5,000
$3,500
$470
$400
$4,383
$4,363
$373
$3,905
$4,133
$453
$500
$450
$4,397
$400
$350
$3,576
$3,000
$300
$2,500
$250
$2,000
$200
$1,500
$150
$1,000
$100
$500
$50
$0
$0
FY 2003/04
FY 2004/05
FY 2005/06
Total General Fund
FY 2006/07
FY 2007/08
Business Tax
23
FY 2008/09
Business Taxx Revenue
$4,000
$466
$435
$4 500
$4,500
General Fu
und Revenue
•
No “Leap of Faith” That Reducing Taxes Will Spur
Growth in Economic Activity & Revenues (Cont.)
• The Number of Taxpayer Accounts Grew 44%, from 329,000 in FY
2004/05 to 473,000 in FY 2008/09
• And, although Economists Dr. Charles Swenson of the University of
Southern California and Blue Sky Consulting Group Disagree on
the Exact Magnitude of the Impact,
Impact They Both Agree that Reducing
Business Taxes Will Increase Economic Activity, Jobs and Other
Indirect Revenues
• Leading Expert Economist Timothy Bartik, cited by both Swenson
and Blue Sky and Author of Who Benefits From State and Local
p
Economic Development
Policies,, states “If a Given Small Suburban
Jurisdiction within a Metropolitan Area [e.g., Los Angeles within
LA County] Raises its Business Taxes by 10%, it can Expect in the
Long Run a Reduction in its Business Activity by from 10% to
30%”
24
No “Leap of Faith” That Reducing Taxes Will Spur
Growth in Economic Activity & Revenues (Cont.)
•
•
•
Bartik also observed that “…Tax Effects on Business Location Decisions are Generally
Much Larger for Intrametropolitan Business Location Decisions than for
Intermetropolitan
p
or Interstate Business Location Decisions. We Would Expect
p
this
Pattern Because a Potential Business Site is Likely to Have Closer Substitutes, Offering
Very Similar Profits, within that Same Metropolitan Area than in Some Other State or
Metropolitan Area.”
Bartik’s
ik’ Comprehensive
C
h i Analysis
A l i Examined
i d 57 Studies
S di off Companies’
C
i ’ Reaction
i to State
S
and Local Taxes During the 1950s-1980s. He concluded that “the Findings of Recent
Studies Differ from those Studies of the 50s, 60s and mid-70s which Generally Did Not
Find Statistically Significant and Negative Effects of Taxes on State and Local
Growth…[However] the Most Recent Business Location Studies have some Evidence of
Significant Negative Effects of State and Local Taxes on Regional Business Growth.”
Bartik’s Seminal Work was Published in 1991; the Internet was First Commercialized in
1995, Forever Changing the Face of Global Commerce. The Logical Conclusion of
Bartik’s Observation Above is that a 10% Change in City Business Taxes Today Would
Have a Significantly Greater Impact on the Level of Business Activity than 10%-30%
Angeles’ Service-Based Economy Makes Businesses
Since Modern Technology and Los Angeles
Far More Portable than Ever Before.
25
Eradicate The Most Visible Reason Not To Do Business
In Los Angeles: The 0.507% Job-Killer Rate
• “Professions & Occupations” and “Miscellaneous Services” (0.356%
Rate)―City’s Two Highest Rate Classes―Are Where All the HighP i Service
Paying
S i Jobs
J b Emanate
E
t
• Because They are the “Catch-All” Categories, Most Innovative New
p
Engines
g
that Fuel Economic Growth
Businesses―the Entrepreneurial
and the Preponderance of New Jobs―End Up So Classified
– Clean Tech
– Emerging Technologies
– Engineering, Research & Development
• LA Risks Stunting the Growth of its Nascent “Silicon
Silicon Beach
Beach”
• By the Time a Fledgling New Business Takes Shape to be More
Properly Categorized, It’s Gone―Chased Away by Punitively High
Business Tax Rates
26
Tax Simplification, Transparency & Equity
Proposed Timeline
Stage 1:
Years 1-5
Stage 2:
Years 66-10
10
Stage 3:
Years 11-15
• Consolidate 9 Tax Classes into 3
• Reduce Top Rates to 0.255% Over 5 Years in Equal Installments
• Offsetting Direct & Indirect Revenue Gains Must be Achieved in 3rd & 5th
Years to Trigger Continued Rate Reduction
• Consolidate 3 Tax Classes into 2
• Reduce Top Rate by one-half to 0.127% Over 5 Years in Equal Installments
• Offsetting Direct & Indirect Revenue Gains Must be Achieved in 8th & 10th
Years to Trigger Continued Rate Reduction
• Finish Phasing-Out Gross Receipts Business Tax
• Complete Transformation of City from Least Competitive to Most
Competitive Jurisdiction in LA County
• Final Tax Reform Guaranteed to be Revenue Neutral or Accretive to
Revenue with Triggers Along the Way in 12th & 14th Years
27
Tax Simplification, Transparency & Equity
Stage
g 1: Simplify
p y & Provide Relief to Taxpayers
p y Paying
y g Highest
g
Rates
FY 10-11
Gross Receipts
$5,040,721,782
30,921,035,644
, , ,
18,521,246,457
47,294,653,543
3,353,225,984
4,937,632,549
522,307,619
3,877,183,427
48 684 338 462
48,684,338,462
15,321,269,307
395,021,961
512,752,941
Description
Child/Multimedia/Phone/Tugboat
Wholesale Sales
Rental/Swap/Hotel/Antique
p
q
Retail Sales
Radio/TV/Theater
Prop/Coll/Sport/Vend/Freight
Broker/Telemarketing
Miscellaneous Services
Professions/Occupations/HMO
Contractor
Contractor- "B" Gross
Sale- Real Property
Motion Picture Prod
Transporting Persons for Hire
Trucking/Hauling
Other
# of
Accounts
7,319
34,025
52,269
,
91,964
4,402
5,954
2,301
9,535
201 823
201,823
35,640
17,221
376
4,771
2,997
886
2,703
474,186
Class
1
2
3
4
5
6
7
8
9
Other
Other
Other
Other
Other
Other
Other
Before
Rate
Taxes Paid
0.101% $5,091,129
0.101% 31,230,246
0.127% 23,521,983
, ,
0.127% 60,064,210
0.127%
4,258,597
0.255% 12,590,963
0.315%
1,645,269
0.356% 13,802,773
0 507% 246,829,596
0.507%
246 829 596
0.101% 15,474,482
0.255%
1,007,306
0.255%
1,307,520
2,187,943
963,451
108 117
108,117
1,044,013
$421,127,598
Class
1
1
2
2
2
3
3
3
3
1
3
3
Other
Other
Other
Other
After
Rate
0.101%
0.101%
0.127%
0.127%
0.127%
0.255%
0.255%
0.255%
0 255%
0.255%
0.101%
0.255%
0.255%
Total Reduction in Taxes
FY 10-11
Gross Receipts
Description
$51,283,026,733 Wholesale
69,169,125,984 Retail & Media
58,929,236,959 Services & Professions
Other
Taxes Paid
$5,091,129
31,230,246
23,521,983
, ,
60,064,210
4,258,597
12,590,963
1,331,884
9,886,818
124 145 063
124,145,063
15,474,482
1,007,306
1,307,520
2,187,943
963,451
108 117
108,117
1,044,013
$294,213,725
$126,913,873
# of
Accounts
76,984
148,635
237,210
11,357
474,186
Class
1
2
3
Consolidated
Rate
Taxes Paid
0.101% $51,795,857
0.127% 87,844,790
0.255% 150,269,554
4,303,524
$294,213,725
• Gradually consolidating all 9 classes into 3 (Wholesale
(Wholesale, Retail & Media and Services & Professions) over 5
years will simplify the tax code for businesses, minimize classification “gamesmanship” and enhance the
City’s competitiveness with surrounding municipal jurisdictions
28
Rationale for Initially Only Changing Rates of
g
Classes 7-9 While Leavingg 1-6 Unchanged
•
Classes 1 & 2 Already at Low Enough Rate (.101%) to Avoid Being “Tipping
Point” So Combine them into New Class 1 (Wholesale)
• Classes 3-5
3 5 are Next Highest Rate but Still Within Reason (.127%)
( 127%) as Consist of
Land Use-Based Businesses that Require Higher Levels of City Services
Warranting the Slightly Higher Rate So Combine them into New Class 2 (Retail
& Media)
– Class 3 Includes Office & Commercial Properties Tied to In-City Real Estate
so Flight Not a Factor
City Real
– Classes 4 & 5 Include Retail Stores & Theaters also Locked into In
In-City
Estate
• Classes 6-9 Include Professional Services Firms, Telemarketers, Collection
Agencies,
Agencies Brokers and Personal Services Firms—All
Firms All Highly Mobile for which
Flight is a Viable and Real Option So Combine them into New Class 3 (Services
& Professions)
( 315%) 8 (.356%)
( 356%) & 9 (.507%)
( 507%) are Onerous & NonNon
• Tax Rates for Classes 7 (.315%),
Competitive to Point of Making Flight from City a Reality
29
Prudent, Responsible Tax Reform
• 15-Year
15 Year Plan to Simplify,
Simplify Reform and Ultimately Phase
Phase-Out
Out Gross Receipts Tax
has Built-In “Safety Belt” to Protect City Budget Designed to Ensure Revenue
Neutrality from the Tax Reform
• Prior to Implementation of 1st Year of Rate Reductions, Base Year will be Set at
Current Amount of City Receipts of both Direct & Indirect Revenues Tied to
Level of Economic Activity
y
― Business Taxes
― Documentary Transfer Taxes
― Sales Taxes
― Parking Users’ Taxes
― Property Taxes (Real &
Personal)
― Power Revenue Transfers
― Utility Taxes
― Residential
id i l Development
l
Taxes
― Licenses, Permits & Fees
― Other Economy-Sensitive Taxes,
Fees & Assessments
― Transient Occupancy Taxes
― Parking Fines
30
Prudent, Responsible Tax Reform (Cont.)
• After 3rd Year of Stage
g 1 Gross Receipts
p Tax Simplification/Reduction―at
p
Which Time 0.507%
Rate will have Declined to Level of Next Highest Rate (0.356%)―Cumulative Level of Direct &
Indirect City Revenues Impacted by Economic Activity will be Compared to Cumulative Amount of
Business Tax Reductions (both Calculated from Base Year Levels)
― If such Gain in City Revenues is Equal to or Greater than Amount of Reduction in Business
Taxes, 4th & 5th Years of Business Tax Reduction will be Triggered, Making Classes 6-9 all
Uniformly at 0.255% (the New Class 3)
― If such Gain in City Revenues is Less than Amount of Reduction in Business Taxes, 4th &
5th Years of Business Tax Reductions will be Temporarily Deferred Until such Time as
Cumulative Revenue Gains Equal or Exceed Cumulative Amount of Business Tax
R
d ti
Reductions
• Same “Gut Check” Procedure Will Occur at the End of 5th, 8th, 10th, 12th and 14th Years of Business
Tax Simplification & Elimination Plan
• Objective & Expectation is that Simplification―from 9 Classes to 3 Classes (ideally, within 5
Years), from 3 Classes to 2 Classes (within 10 Years) and from 2 Classes to No Classes (Within 15
Years)―and Reduction―from Rates of 0.101%-0.507% to 0.101%-0.255% (ideally, within 5 Years)
from 0.101%-0.255%
0 101% 0 255% to 0.101%-0.127%
0 101% 0 127% (within 10 Years) and from 0.101%-0.127%
0 101% 0 127% to Zero
Percent (within 15 Years) will be, at Worst, Revenue Neutral and, at Best, Significantly Revenue
Positive
31
Tax Simplification, Transparency & Equity
Timeline
Y 1
Year
Commence Process to
Consolidate Cumbersome 9
Classes Into 3 Classes By
Beginning to Reduce Top Tax
%, 0.356%
%&
Rates From 0.507%,
0.315% to 0.255% Over 5 Years
Year 3:
1st Trigger
Year 5:
2nd Trigger
Revenue Gains Will Be Reassessed
to Determine if Business Tax Rate
Reduction Should Continue on to
Stage 2
If Cumulative Direct & Indirect
Revenue Gains are Greater Than or
Equal to Cumulative Business Tax
Revenue Reduction, Tax Rate
Declines Continue for Next 2
Years
Scheduled Tax Rate Declines May
be Temporarily Halted Again To
Let Revenue “Catch-Up”
If Cumulative Gains Do Not Fully
Compensate for Tax Revenue
Reduction, Annual Tax Rate
Decline is Halted Until Revenue
“Catches-Up,” At Which Point
Rate Reductions Resume
After Revenue Gains Have
Reached Neutrality, Rate
Reductions Commence Anew
32
Tax Simplification, Transparency & Equity
Stage
g 1―Consolidation of Classes: Five-Year Phase-In
Tax Rate Reduction
Goes Forward as
Revenue Gains
Increase in LockStep with Business
Tax Reduction
Class
1
2
3
4
5
6
7
8
9
Other
FY 10-11
Gross Receipts
$5,040,721,782
30,921,035,644
18,521,246,457
47 294 653 543
47,294,653,543
3,353,225,984
4,937,632,549
522,307,619
3,877,183,427
48,684,338,462
Status Quo
Rate
Taxes Paid
0.101%
$5,091,129
0.101%
31,230,246
0.127%
23,521,983
0 127%
0.127%
60 064 210
60,064,210
0.127%
4,258,597
0.255%
12,590,963
0.315%
1,645,269
0.356%
13,802,773
0.507%
246,829,596
22,092,832
$421 127 598
$421,127,598
Annual Reduction in Business Tax
Cumulative Reduction in Business Tax
Year 3
Tax Rate Reduction
Halts Temporarily,
if Necessary, to
Allow Revenue
Gains to “CatchUp”
Class
1
2
3
4
5
6
7
8
9
Other
Year 1
Year 2
Assuming 20% Reduction
Rate
Taxes Paid
0.101%
$5,091,129
0.101%
31,230,246
0.127%
23,521,983
0 127%
0.127%
60 064 210
60,064,210
0.127%
4,258,597
0.255%
12,590,963
0.303%
1,582,592
0.336%
13,019,582
0.457%
222,292,689
22,092,832
$395 744 823
$395,744,823
Assuming 40% Reduction
Rate
Taxes Paid
0.101%
$5,091,129
0.101%
31,230,246
0.127%
23,521,983
0 127%
0.127%
60 064 210
60,064,210
0.127%
4,258,597
0.255%
12,590,963
0.291%
1,519,915
0.316%
12,236,391
0.406%
197,755,783
22,092,832
$370 362 049
$370,362,049
$25,382,775
$25,382,775
$25,382,775
$76,148,324
Year 4
FY 10-11
Assuming 60% Reduction Assuming 80% Reduction
Gross Receipts
Rate
Taxes Paid
Rate
Taxes Paid
$5 040 721 782
$5,040,721,782
0 101%
0.101%
$5,091,129
$5
091 129
0 101%
0.101%
$5 091 129
$5,091,129
30,921,035,644
0.101%
31,230,246
0.101%
31,230,246
18,521,246,457
0.127%
23,521,983
0.127%
23,521,983
47,294,653,543
0.127%
60,064,210
0.127%
60,064,210
3,353,225,984
0.127%
4,258,597
0.127%
4,258,597
4,937,632,549
0.255%
12,590,963
0.255%
12,590,963
522,307,619
0.279%
1,457,238
0.267%
1,394,561
3 877 183 427
3,877,183,427
0 295%
0.295%
11 453 200
11,453,200
0 275%
0.275%
10 670 009
10,670,009
48,684,338,462
0.356%
173,218,876
0.305%
148,681,970
22,092,832
22,092,832
$344,979,274
$319,596,500
Annual Reduction in Business Tax
Cumulative Reduction in Business Tax
$25,382,775
$152,296,647
Year 5
Assuming Full Reduction
Rate
Taxes Paid
0 101%
0.101%
$5 091 129
$5,091,129
0.101%
31,230,246
0.127%
23,521,983
0.127%
60,064,210
0.127%
4,258,597
0.255%
12,590,963
0.255%
1,331,884
0 255%
0.255%
9 886 818
9,886,818
0.255%
124,145,063
22,092,832
$294,213,725
$25,382,775
$253,827,746
$25,382,775
$355,358,844
• Th
The initial
i iti l consolidation
lid ti off classes
l
andd gradual
d l reduction
d ti in
i tax
t rates
t will
ill occur over a 5-year
5
ti frame
time
f
which
hi h
should allow indirect revenue gains and incremental business taxes from influx of new businesses to result in
revenue neutrality
33
Tax Simplification, Transparency & Equity
Rates in 15 Highest Cities in Los Angeles County—“Professions & Occupations” Catch-All
Los Angeles
Santa Monica
Culver City
Inglewood
El Monte
San Fernando
Claremont
Compton
Gardena
Hawthorne
Lomita
Palmdale
Bell
Huntington Park
Irwindale
Current
0.507%
0.503%
0.301%
0.165%
0.147%
0 132%
0.132%
0.111%
0.107%
0.101%
0.100%
0.073%
0.056%
0.044%
0.040%
0.033%
Santa Monica
Culver City
Los Angeles
Inglewood
El Monte
San Fernando
Claremont
Compton
Gardena
Hawthorne
Lomita
Palmdale
Bell
Huntington Park
Irwindale
Proposed after Stage 1
0.503%
0.301%
0.255%
0.165%
0.147%
0 132%
0.132%
0.111%
0.107%
0.101%
0.100%
0.073%
0.056%
0.044%
0.040%
0.033%
• Simplified and lowered tax code will make the City significantly more competitive compared to surrounding
municipal jurisdictions and far more job- and business-friendly
Source: 2010 Kosmont-Rose Institute
Cost of Doing Business Survey
34
Proposed Stage 1 Rate Change—Los Angeles
vs. Select Other Competing L.A. County Cities
Current
Rate
Variance
(vs. L.A.)
Proposed
p
Rate
Variance
(vs. L.A.)
Los Angeles
0.507%
0.000%
0.255%
0.000%
Pasadena
0.108%
-0.399%
0.108%
-0.147%
Long Beach
0.027%
-0.480%
0.027%
-0.228%
Burbank
0.009%
-0.498%
0.009%
-0.246%
Culver City
0.003%
-0.504%
0.504%
0.003%
-0.252%
0.252%
Hawthorne
0.001%
-0.506%
0.001%
-0.254%
Torrance
0.001%
-0.506%
0.001%
-0.254%
Glendale
0 000%
0.000%
-0.507%
0 507%
0 000%
0.000%
-0.255%
0 255%
35
Tax Simplification, Transparency & Equity
Stage
g 2: Five-Year Reduction in New Class 3 Rate
Year 5
Class
1
2
3
Other
FY 10-11
Gross Receipts
$51,283,026,733
69,169,125,984
58,929,236,959
Year 7
Consolidated Classes
Assuming 20% Reduction Assuming 40% Reduction
Rate
Taxes Paid
Rate
Taxes Paid
Rate
Taxes Paid
0.101%
$51,795,857
0.101%
$51,795,857
0.101%
$51,795,857
0.127%
87,844,790
0.127%
87,844,790
0.127%
87,844,790
0.255%
150,269,554
0.229%
135,183,670
0.204%
120,097,785
4,303,524
4,303,524
4,303,524
$294,213,725
$279,127,841
$264,041,956
Annuall R
A
Reduction
d ti in
i Business
B i
Tax
T
Cumulative Reduction in Business Tax
$15 085 885
$15,085,885
$15,085,885
Year 8
Class
1
2
3
Other
Year 6
Year 9
Year 10
FY 10
10-11
11
Assuming 60% Reduction Assuming 80% Reduction
Gross Receipts
Rate
Taxes Paid
Rate
Taxes Paid
$51,283,026,733
0.101%
$51,795,857
0.101%
$51,795,857
69,169,125,984
0.127%
87,844,790
0.127%
87,844,790
58,929,236,959
0.178%
105,011,900
0.153%
89,926,016
4 303 524
4,303,524
4 303 524
4,303,524
$248,956,071
$233,870,187
Annual Reduction in Business Tax
Cumulative Reduction in Business Tax
$15,085,885
$90,515,308
$15 085 885
$15,085,885
$45,257,654
$15,085,885
$150,858,847
Assuming Full Reduction
Rate
Taxes Paid
0.101%
$51,795,857
0.127%
87,844,790
0.127%
74,840,131
4 303 524
4,303,524
$218,784,302
$15,085,885
$211,202,385
• F
Further
th hhalving
l i off the
th new Class
Cl 3 top
t rate
t off 0.255%
0 255% to
t the
th new Class
Cl 2 rate
t off 0.127%
0 127% over a five-year
fi
ti
time
period will increasingly lower the City’s artificial barrier to heightened economic activity and job growth
36
Tax Simplification, Transparency & Equity
Rates in 15 Highest Cities in Los Angeles County—“Professions & Occupations” Catch-All
Los Angeles
Santa Monica
Culver City
Inglewood
El Monte
San Fernando
Claremont
Compton
Gardena
Hawthorne
Lomita
Palmdale
Bell
Huntington Park
Irwindale
Current
0.507%
0.503%
0.301%
0.165%
0.147%
0 132%
0.132%
0.111%
0.107%
0.101%
0.100%
0.073%
0.056%
0.044%
0.040%
0.033%
Santa Monica
Culver City
Inglewood
El Monte
San Fernando
Los Angeles
Claremont
Compton
Gardena
Hawthorne
Lomita
Palmdale
Bell
Huntington Park
Irwindale
Proposed after Stage 2
0.503%
0.301%
0.165%
0.147%
0.132%
0 127%
0.127%
0.111%
0.107%
0.101%
0.100%
0.073%
0.056%
0.044%
0.040%
0.033%
• Continuing to simplify and lower the tax code will increase the City’s competitiveness with surrounding municipal
jurisdictions
Source: 2010 Kosmont-Rose Institute
Cost of Doing Business Survey
37
Proposed Stage 2 Rate Change—Los Angeles
vs. Select Other Competing L.A. County Cities
Current
Rate
Variance
(vs. L.A.)
Proposed
Rate
Variance
(vs. L.A.)
Los Angeles
0.507%
0.000%
0.127%
0.000%
Pasadena
0.108%
-0.399%
0.399%
0.108%
-0.019%
0.019%
Long Beach
0.027%
-0.480%
0.027%
-0.100%
Burbank
0.009%
-0.498%
0.009%
-0.118%
Culver City
0 003%
0.003%
-0.504%
0 504%
0 003%
0.003%
-0.124%
0 124%
Hawthorne
0.001%
-0.506%
0.001%
-0.126%
Torrance
0.001%
-0.506%
0.001%
-0.126%
Gl d l
Glendale
0 000%
0.000%
-0.507%
0 507%
0 000%
0.000%
-0.127%
0 127%
38
Tax Simplification, Transparency & Equity
Stage
g 3: Complete
p
Elimination of the Business Tax Over Five Years
Year 10
Class
1
2
3
Other
FY 10-11
Gross Receipts
$51,283,026,733
69,169,125,984
58,929,236,959
Year 12
Consolidated Classes
Assuming 20% Reduction Assuming 40% Reduction
Rate
Taxes Paid
Rate
Taxes Paid
Rate
Taxes Paid
0.101%
$51,795,857
0.081%
$41,436,686
0.061%
$31,077,514
0.127%
87,844,790
0.102%
70,275,832
0.076%
52,706,874
0.127%
74,840,131
0.102%
59,872,105
0.076%
44,904,079
4,303,524
3,442,819
2,582,114
$218,784,302
$175,027,442
$131,270,581
Annuall R
A
Reduction
d ti in
i Business
B i
Tax
T
Cumulative Reduction in Business Tax
$43 756 860
$43,756,860
$43,756,860
Year 13
Class
1
2
3
Other
Year 11
Year 14
Year 15
FY 10-11
10 11
Assuming 60% Reduction Assuming 80% Reduction
Gross Receipts
Rate
Taxes Paid
Rate
Taxes Paid
$51,283,026,733
0.040%
$20,718,343
0.020%
$10,359,171
69,169,125,984
0.051%
35,137,916
0.025%
17,568,958
58,929,236,959
0.051%
29,936,052
0.025%
14,968,026
1 721 410
1,721,410
860 705
860,705
$87,513,721
$43,756,860
Annual Reduction in Business Tax
Cumulative Reduction in Business Tax
$43,756,860
$262,541,162
$43 756 860
$43,756,860
$131,270,581
$43,756,860
$437,568,604
Assuming Full Reduction
Rate
Taxes Paid
0.000%
$0
0.000%
0
0.000%
0
0
$0
$43,756,860
$612,596,045
• Th
Throughout
h t period
i d off ttax reform,
f
LA reaps public
bli relations
l ti
b
bonanza
f b
for
being
i ““open for
f b
business”
i
” and
d ffor
taking decisive, affirmative action to put Angelenos “back to work”
39
Business Tax Elimination:
Broad-Based & All-Encompassing
p
g
•
Elimination of Business Tax Must be Across the Board for All Industries & Size
Companies
– Opportunity is for LA Once & for All to Shatter its Business Unfriendly
Reputation & Reverse 30-Year History of Job Declines
– Vast Preponderance (88%) of Net New Job Creation Driven by Small
Business
Business*
Net New Job Creation by Firm Size (Employees)
1993 - 2006
500+, 12.0%
20 – 499, 16.0%
< 20, 72.0%
*Source: U.S. Small Business
Administration, U.S. Department of
Labor & Census Bureau
40